Spread Risk Seasonally

Jeff Todd wastes little time in making corn or soybean sales - all through the year. His spread sales, up to a dozen or more separate marketing moves, usually produce positions that yield an overall return that takes advantage of traditional rallying periods as well as unexpected spikes.

The Clarkton, MO, corn, soybean, wheat and cotton grower doesn't use many futures or options to get his crops sold. “I do my own marketing and depend on cash forward contracts,” he says.

It's a scale-up strategy that sees him make sales when markets rally during seasonal swings. Seasonal selling doesn't work every year. But even last year, the most volatile on record, saw prices follow seasonal trends that tracked similar prices seen most of the past few decades.

“It's been a pattern for at least 20 years,” says Chad Hart, Iowa State University (ISU) Extension economist. “We typically see the best prices in May, June or July. There was an exception in 2006 and 2007 when there was a steady rise in prices through last July (2008).”

TODD TOOK ADVANTAGE of those rallies. He farms about 4,000 acres in his rotation. His irrigated corn yields are 175 bu; soybeans yield 50 bu. There's a lot of money to leave on the table if he doesn't get a good price. Spreading his sales, with more made March through July, help put him close to the top third of the annual market price.

“I make corn sales in 5,000-10,000-bu. increments and beans sales in 2,500-5,000-bu. increments,” he says. “I probably get most of my sales made from late winter to mid-summer. As you get closer to harvest, you are not under pressure because something drastic would probably have to happen for the market to go up a lot.”

His soybean cash contracts ranged from $8 to $14/bu. and were made mostly in $1 increments. “I started at $8 early in the year, then got beans contracted at $11, $12, $13 and $14,” says Todd, noting that his final contracts were made in early July. “I didn't get any sold at the high of over $16, but managed to have a pretty good spread program.”

For corn, scale-up sales were made in 50¢ increments, starting with about $4. He walked up the market at $4.50, $5, $5.50 and $6. “Right or wrong, you have to have a plan,” he says.

Hart says spread selling - especially getting part of the expected crop sold in spring and early summer - should be in a marketing plan.

“Futures usually show some strength as you move into the middle of the marketing year,” he says. “Growers should at least make some forward sales when we typically see the highest prices in May and June. Follow that pattern and you'll usually win out.”

ISU RESEARCH HAS examined average monthly Iowa corn and soybean prices since 1925. From 1980 to 2000, peak corn markets were consistently highest between March and July, with the top of the market in May and June.

Soybean prices followed the same track. There were exceptions during some drought years like 1995, when prices peaked at harvest.

The 2000-2007 period saw a little broader trend for prices received by Iowa growers. In 2000, the highest corn and soybean prices, $2.07 and $5.17, respectively, were in May. In 2001, $1.91 in December was the high corn price, even though the market varied only 19¢ all year, while the high bean price, $4.77, was in August.

The 2002 high bean price, $5.42, was at harvest, with the high corn price of $2.43 in September. In following years, the highest prices were: 2003, corn, $2.31 in May, beans, $7.34 in December; 2004, corn, $2.80 in May, beans, $9.72 in May; 2005, corn, $2.04 in January, beans, $6.58 in July; 2006, corn, $3.03 in December, beans, $6.27 in December; and 2007, corn, $3.90 in December, and beans, $10.50 in December.

For 2008, Iowa prices followed the 1980-2000 trend with corn peaking in June at about $7 and beans popping $14, also in June. Even though the rallies coincided with the new demand for ethanol and higher crude oil prices, they still tracked traditional trends. They fell off from July on.

Hart says that although harvest prices are traditionally the lowest, because of the flood of product into the market, USDA projects that for the 2008-2009 marketing year, over 40% of the corn and 50% of the soybeans will be sold by farmers between October and January, based on a five-year average.

But in April-July, months with traditionally higher prices, about 22% of the corn and less than 20% of the soybeans will be sold.

Hart would like to see more growers shift from harvest marketing to spring and summer marketing. Unfortunately, tight storage situations and the need to generate cash flow prevents it, he says.

Also, 2008 saw situations where inflated commodity prices forced grain handlers to limit their distant sales to a month or two, preventing contracting at the higher prices for delivery down the road. Spread sales were likely disrupted for some.

Todd knows he's not likely to hit the high in the market and doesn't count on it. “If you go into it thinking you're going to hit the high, it's probably not going to happen,” he says. “Aim for a price that's good for you in a spread program. I'm usually in the upper 50% and often the upper third.

“It helps when you go see your banker. Your banker is relieved to know you are abreast of things. It's a confidence builder,” he says.

Hart agrees about swinging for a home run every time. “I've talked to a lot of people about marketing,” he says. “I tell them you can't get caught up trying to get the high. You have to take advantage of higher prices when you can, even though they may not be the high for the year.”